Office Market Shows Continuing Weakness in Q3: Colliers

The nationwide office market trudged slowly through the third quarter of 2008, posting the fourth consecutive quarterly rise in vacancy, according to a report from Colliers International. According to the report, national office vacancies stood at 13.7 percent at the close of the quarter, back to vacancy levels last seen

The nationwide office market trudged slowly through the third quarter of 2008, posting the fourth consecutive quarterly rise in vacancy, according to a report from Colliers International. According to the report, national office vacancies stood at 13.7 percent at the close of the quarter, back to vacancy levels last seen in Q4 2005.This ascending trend in vacancy was reflected in both downtown (CBD) and suburban markets nationwide, with vacancy rates at 11.4 percent for downtown markets and 14.8 percent for suburban markets, Colliers said. The slowdown in demand for office space is consistent with a struggling national economy and ongoing contraction of the labor force, as the country continues to feel the effects of the credit crisis. Downtown Class A vacancy across the United States rose slightly from 10 percent in June to 10.3 percent by the end of September. In the suburbs, Class A vacancy increased from 14.3 percent to 14.9 percent. Market polling results showed 32 of the 53 downtown markets surveyed by Colliers posted a rise in vacancy, as did 49 of the 55 suburban markets surveyed. Net absorption was negative for the third consecutive quarter, registering negative 2.24 million square feet. Most of the space was returned in downtown markets, which gave back 2.63 million square feet collectively. The suburban Class A markets, however, which saw 4.25 million square feet of positive absorption, was the strongest demand for office space. Consistent with the last several quarters, new construction measured 19 million square feet of newly completed office space nationwide. And more than 90 percent of the new supply appeared in suburban markets. Asking rents showed a slight softening during the third quarter, with downtown Class A lease rates off their Q2 average by 1.4 percent, clocking in this quarter at $49.39 per square foot. However, this registers 1.7 percent higher than what was reported at the outset of 2008. Suburban Class A rents averaged $28.44 per square foot, down 1.0 percent for the quarter, and down 0.8 since the beginning of the year. The third quarter also saw an increase in subleased space. Office space that was available on a sublease basis increased four percent during the July through September period, and 13.4 percent year-over-year. There is currently 65.7 million square feet of space available for sublease on the market. This trend of companies subleasing their office space points toward economic weakness and can also be viewed as a negative harbinger of lease rates, according to the Colliers report. The current level of sublease space, however, is well below the peak seen during Q4’02–when sublease space totaled 142.9 million square feet.“As the fourth quarter begins, we find ourselves bracing for what could be a fairly substantial recession,” Ross Moore, executive vice president & director of market and economic research at Colliers International, said in a release. “However, there are a number of reasons why it could also be relatively short. Recent actions taken by policymakers have been unprecedented–and the efficacy of these extraordinary steps will only become clear in future quarters.”

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